China Cutting Health-Care Costs Threatens Drugmaker Profits

Capsules are deposited in a bag before packaging on the production line of the Popular Pharmaceuticals Ltd. Photographer: Tomohiro Ohsumi/Bloomberg

March 14 (Bloomberg) -- China vowed to extend drug-price
cuts, rankling some of the country’s largest manufacturers, in
an overhaul of its health-care system to trim the cost of caring
for an aging population.

Political leaders, wrapping up their annual National
People’s Congress in Beijing today, pledged to make medical care
more affordable and widen coverage of state-paid health
insurance. The plan will be supported by a tendering system
tested in Anhui province that encourages drugmakers to compete
on price and quality for state contracts.

While the elderly were looked after in the past by their
children, urbanization and the nation’s one-child policy have
eroded the tradition of family care, shifting the burden to the
state. The government wants to broaden the use of the new
procurement method, which led to price reductions of at least 30
percent on medicines on its essential drugs list in the past
year, said Sun Zhigang, the top official overseeing the changes.

“The China government will keep increasing the number of
drugs on the essential drugs list and expand the coverage” from
basic health centers to hospitals, Nomura Holdings Inc. health-care analysts Gideon Lo and Sunny Ding said in a March 13
report. “This move is positive for drugmakers long term as it
will likely help to drive volume growth.”

The cost-cutting measures have so far led to profit
warnings at United Laboratories International Holdings and Wuyi
International Pharmaceutical Company. United Laboratories, whose
shares trade in Hong Kong, said last month that its 2011 income
would “decrease materially” because of the government’s price
reduction policies.

‘Irresponsible’ Policy

“Health-care reform is basically about tendering to
compete on prices, and I feel this is irresponsible to the drug
industry,” said Guo Guangchang, chairman and co-founder of
Fosun International Ltd., which controls one of China’s biggest
drugmakers, Shanghai Fosun Pharmaceutical Co. “They need to
prioritize on guaranteeing quality first, rather than focusing
on just prices, or this will be very unfair to China’s
drugmakers,” Guo, ranked China’s 27th richest by Forbes
Magazine, told reporters on March 9 in Beijing, where he also
attended the legislative meeting.

The Research and Development-Based Pharmaceutical
Association Committee, an industry group representing the
interests of multinational drugmakers including Pfizer Inc. and
Merck & Co., is also lobbying against the expansion of the so-called Anhui model tendering system.

Safety Guarantee

“The tendering system that we have implemented for basic
drugs has proved to be effective and able to guarantee the
drugs’ safety, reasonable prices, and timely supply,” Sun,
deputy director of the National Development and Reform
Commission, said on March 7. “Our next step is to further
improve on these plans,” said Sun, who also heads the State
Council health-care reform office.

GlaxoSmithKline Plc, the U.K.’s largest drugmaker, hasn’t
been treated unfairly by the Chinese government compared with
local companies, Chief Executive Officer Andrew Witty said.

“There is a tension that the Chinese government needs to
try and manage, but I feel like we get a fair treatment here in
China,” he said in an interview in Beijing on March 5.

Witty declined to say how much the government’s price cuts
have affected Glaxo’s margins in China.

No ‘Easy Ride’

“Nobody expects drug companies to be given an easy ride,”
he said. “What we do look for is a fair playing field, and I
think in China we’ve got that,” said Witty, who has 4,000
medical representatives selling Glaxo’s drugs throughout China.

The government isn’t likely to back down before a
leadership transition in which the ruling Communist Party will
appoint a new generation of leaders this year, said Jason Mann,
a Hong Kong-based health-care analyst at Barclays Capital.

“Drug companies face growing risk as political
scapegoats,” he said in a telephone interview on March 12.
“Though profits are shrinking significantly, these firms remain
profitable, and in some conversations we’ve had within the
government, that reason alone is enough to support further price
cuts this year.”

Shineway fell as much as 5.8 percent in Hong Kong trading,
the most since Nov. 16, before closing 0.9 percent lower at
HK$13.70. United Labs declined 2.7 percent to close at a seven-day low of HK$5.40. Hong Kong’s benchmark Hang Seng index fell
0.2 percent. In Shanghai, Fosun Pharmaceutical lost the most in
seven months to finish 4.2 percent lower at 9.22 yuan.

Cancer Treatments

In addition, the government’s intention to target price
reductions across more expensive medicines, such as cancer
treatments and heart pills, could mean more drugmakers are
affected, Mann said. The number of people with cancer in China
is increasing as the population lives longer.

China had 178 million people over 60 in 2009. The tally
could reach 437 million, one third of the population, by 2050,
according to the United Nations. After expanding 2.5 percent a
year for the past three decades, China’s working-age population
has stopped growing and will contract 1 percent a year by the
mid-2020s, according to the Center for Strategic and
International Studies in Washington.

That’s intensifying the need to drive down government-paid
medical costs.

Foreign Companies

China’s Minister of Health Chen Zhu wants the tendering
system to apply to about 800 medications, from 307 now, and
include oncology drugs used in large hospitals. The sale of
expensive treatments for major illnesses mostly benefits
“foreign drug companies,” Zhao Ping, the former head of the
Cancer Institute and Hospital in Beijing, told reporters on
March 10, adding that he supports the government’s measures.

“At the Cancer Hospital, most of the drugs we use are
imported from overseas, and just one oncology drug can cost as
much as 20,000 yuan ($3,200),” said Zhao, who is a member of
the Chinese People’s Political Consultative Conference’s health-care committee, an advisory body to the government. “A lot of
our medical expenses goes needlessly to foreigners.”

Zhao, who was speaking at a briefing held alongside the
legislative meetings, said he has been “strongly proposing”
that the government invest more to support local drug companies
to create their own drugs as a way to control prices.